New Series: Effects of High Frequency Trading (HFT) on Modern Markets and Program Trading, July 30th 2013

Hello readers,

with this post I am going to start a new series of articles related to the effects of High Frequency Trading (HFT) on the Modern Markets and on Program Trading?

Why would we worry about HFT as retail traders? HFT can affect our day trading on the smaller timeframe (4 hours and lower). But most importantly HFT has effects on Program Trading. This is very relevant to me and to those who follow my trading method!

Why would that be? Well, in modern, high-volume markets knowing what Program Trading is doing can be used to develop a unique edge. My work as a trader and analyst is all about modelling the effects of Program Trading on price. So to my perspective it is very important to know how HFT can affect prices. And I strongly believe knowing HFT a bit better can help your trading even if you do not take advantage of the edge I have developed.

Hereunder is the abstract for the series of articles I am going to write, which are based on a recent research paper I have published for IFTA (Italian Chapter, SIAT)

High Frequency Trading (HFT) is widely spread in Europe and in the North American markets, with volumes estimated between 35% to 75%. Unfortunately the effects of HFT systems on the markets are very negative, especially during repeated and unavoidable stress situations, during which effects on price compound and multiply.

This series of articles describes the effects of HTF on markets highlighting, in particular, the causes of social and technical instability, the modification of price structure and the consequences on traders’ behavior. The presence of HFT influences the effectiveness of Program Trading – another computer-based class of algorithms with a stabilizing effect on the markets.

The portion of Program Trading referenced in the series of articles is indeed based on cause-effect rules activated by well defined price levels. Modeling such rules as a result of my research, allowed me to identified the trading edge in the method I use to trade the markets.

The rules used by Program Trading have evolved in the years to perfectly match the psychological response of traders, taken as an aggregated group, guaranteeing an ordered development of price on markets characterized by high volumes.

The presence of HFT disturbs the markets, which are not allowed to work properly due to the modification in price structure. The emergence of a weak price structure generates market dynamics not allowing traders who provide liquidity to be rewarded, while only rewarding perfect market timing, which we all know it is very difficult to obtain.

The last part of the series of articles will consider the potential evolution of HFT, from a technology point of view, too, and how professional and retail traders can counteract the presence of HFT if, as it seems, a more decisive and effective regulation of the phenomenon will not be undertaken by the appointed authority.

I hope you enjoy the new series of articles.

Have a great evening.

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Filed under Articles, Education, English language, High Frequency Trading, Program Trading, Research Paper, Trading Method

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